Gross and net distribution - Chapter 24 - page 21

Discussion in 'SP7' started by Adithyan, May 29, 2018.

  1. Adithyan

    Adithyan Very Active Member

    We can use the following simple approaches to derive a reserve distribution net
    of reinsurance under non-proportional covers:

    Derive a gross distribution, and scale down the distribution such that the
    mean equals the net best estimate. Under this method, we will usually
    overestimate the uncertainty surrounding net reserves because
    reinsurance protection will dampen down the volatility associated with
    individual large claims.


    Are they saying that gross distribution is scaled down to net best estimate such that the mean remains the same as gross distribution?

    Estimate a distribution of reinsurance to gross reserve ratios and apply
    this to the gross reserve distribution.


    distribution of reinsurance reserve refers to reinsurance recoveries? But this is not the same as net right?

    Kindly help!

    Thanks
     
    Last edited: May 29, 2018
  2. Hemant Rupani

    Hemant Rupani Senior Member

    Mean remain same as mean of NET claims distribution. For example you fit a distribution of Gross claims and have mean X, and Net claims have mean Y.
    You just scale down the gross claim distribution by the factor Y/X.

    Yes, here will get distribution of reinsurance reserves.
     
  3. Adithyan

    Adithyan Very Active Member

    Thank you Hemant for your time and response.

    Derive a gross distribution, and scale down the distribution such that the
    mean equals the net best estimate. Under this method, we will usually
    overestimate the uncertainty surrounding net reserves because
    reinsurance protection will dampen down the volatility associated with
    individual large claims.


    Could you please also explain why is there an overestimation by this method?
     
  4. Hemant Rupani

    Hemant Rupani Senior Member

    Reinsurance cover decrease the volatility more than proportional ceded.
    But if you scale down a distribution, you will scale down the standard deviation with same proportion. Thus, scaling down overestimate volatility.
     
    Adithyan likes this.
  5. Adithyan

    Adithyan Very Active Member

    Thanks a ton Mr. Hemant! Your answers have been extremely helpful!
     

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